ANSWER:
XFDF stands for "XML Forms Data Format." XFDF is an XML-based file format for
representing form data and annotations that are contained in a PDF form.

The XFDF format can be used in a variety of workflows. Here are a just couple of
examples:
Sending form data to a server and receiving modified form data back from the
server. This workflow would look something like this:

Form data in XFDF format is
submitted to the server. (Typically, this would happen when a human user at
a client machine clicks a "Submit" button on the form.)

On the server, the XFDF data
is modified.

The server sends the modified
XFDF data back to the client.

At the client machine, the
fields in the form are populated with the modified data.

Archiving form data. This
workflow would look something like this:

A human user uses Adobe
Acrobat or some other PDF-viewing/editing application* to export the form
data in XFDF format. (To do this in Adobe Acrobat 6.x for Windows, click
Advanced > Forms > Export Forms Data and choose Acrobat XFDF Files (*.xfdf)
for "Save as type." The procedure might be different if you're using another
version of Adobe Acrobat.)

The XFDF file is saved in the
company's archives.

To look at the form data, a
human user would use Adobe Acrobat or some other PDF-viewing/editing
application* to open the XFDF file; this would cause the PDF-viewing/editing
application to 1) find the PDF form from which the form data was exported,
2) load the form data into the form, 3) display the form with the loaded
data on the screen.

You might be wondering why you'd
want to archive an XFDF file containing the data for a PDF form instead of
simply archiving a uniquely named version of the entire PDF form with the data
included in it. There are two reasons:

An XFDF file containing form
data for a PDF form is much smaller than the file containing the PDF form
itself, so archiving XFDF files requires less storage space than archiving
PDF forms.

Some software that people use
to view and interact with PDF forms does not allow the user to save a
filled-in PDF form. For example, the free "Adobe Reader" software does not
allow this.

IMPORTANT NOTE TO DEVELOPERS:
An XFDF file contains the filename and location of the PDF form from which the
form data in that particular XFDF file was exported. Adobe Acrobat (and any
PDF-viewing/editing application that supports PDF forms) relies on that filename
and location in order to retrieve and open the appropriate PDF form when opening
an XFDF file. In other words: when opening an XFDF file, a PDF viewing/editing
application assumes that the PDF form from which the form data was exported is
available at the specified location.

Therefore, if you are a developer that is considering implementation of a system
that archives XFDF data, you'll want to make sure that your system has a
reliable method of storing the required PDF forms in known locations. Otherwise,
it will not always be possible for PDF-viewing/editing applications to retrieve
and open the PDF Forms when they are needed.

*Some PDF-viewing/editing applications do not support all features and
functionality related to PDF forms.

Creating your own XFDF files

As mentioned, the two workflows described above are just examples of how you can
utilize XFDF data. Both of those workflows rely on a PDF-viewing/editing
application such as Adobe Acrobat for creation of the XFDF data.

However, you don't have to rely on a PDF-viewing/editing application to generate
XFDF data ?it is possible to generate XFDF data yourself, and depending upon
what you need to accomplish, it might make sense to do just that. For example,
if you have data stored in a database, it would be possible (if you are a
programmer or if you have access to someone with programming skills) to extract
data from your database and put it in XFDF format. Or, if you have a Web site
where site visitors enter data into an HTML form, you or your programmer could
write a script to convert the data entered by users to XFDF format. As stated
below, the XFDF format is described in detail in Adobe's XML Forms Data Format
Specification, so you'd need to read that document to gain an understanding of
the XFDF format before you'd be able to generate your own XFDF data.

Populating PDF forms with XFDF data dynamically

You don't have to rely on a PDF-viewing/editing application to load XFDF data
into PDF forms. Instead, you (or your programmer) can use a programmer's toolkit
to put XFDF data into your PDF forms automatically. VeryPDF sells three
programmer's toolkits that allow you populate PDF forms with FDF data
automatically: PDF Form Filler Command Line, PDF Form Filler SDK, FDF Merger.

Depending on which of these programmer's toolkits you're using, you might even
be able to put graphics as well as text into your PDF forms!

How to get more information about the XFDF format

The XFDF format is described in Adobe's XML Forms Data Format Specification.